Malaysia's Economy Projected To Grow At 5.1% For Next Two Years But Economic Reforms Imperative To Sustained Growth: World Bank

The Malaysian economy is projected to grow by 5.1 percent in 2013 and 2014, according to the World Bank’s Malaysia Economic Monitor. But to reach its goal of becoming a high-income nation, the Southeast Asian country will need to hasten reforms and shift its focus away from commodities.

The projection is a deceleration from last year’s 5.6 percent growth following weak external conditions, according to 4-traders.com, a news portal for investment.

Malaysia's King Abdul Halim Mu'adzam Shah and Queen Haminah walk to the opening of the parliament sitting at Parliament House in Kuala Lumpur June 25, 2013.
REUTERS/Lai Seng Sin/Pool

"While domestic demand will decelerate in 2013 from the buoyant levels of 2012, it will remain Malaysia's main source of growth," the World Bank said in the report.

The agency expects this year’s growth will be supported by strong momentum in investments, accommodative fiscal and monetary policies, and higher household income, in addition to low unemployment.

Exports are expected to pick up in 2014, offsetting slowing domestic demand due to tighter fiscal and monetary policies next year, the report said.

Despite the optimistic outlook, Malaysia is being advised to carry out reforms that will sustain its current growth. Policies such as food and fuel subsidies, a lack of a consumption-based tax, and a fixed interest rate at 3 percent may need to be changed drastically.

Analysts have been calling on Malaysia to retool its subsidy system and introduce a goods-and-services tax, among other steps, to boost fiscal discipline and help cut its growing budget deficit, which has not gone away since the Asian financial crisis in the late 1990s, 4-traders.com reported.

"The sustainability of Malaysia's favorable near-term outlook into 2015 and beyond hinges on the implementation of structural reforms," the World Bank said.

In addition to subsidy reforms, Malaysia needs to become less reliant on commodities revenue in order to grow into a high-income economy by 2020, the agency added. Malaysia’s key commodity exports are crude oil, natural gas, rubber and palm oil.

With demand in commodities dampened by weak growth in China and the EU, and an abundance of supply globally, the World Bank said that Malaysia needs to diversify its economy, according to the Malaysian Insider, a Malaysian news portal.

"Malaysia has done remarkably well over the last two decades. However, the coming onstream of new sources of global energy is likely to put downward pressure on several commodity prices," Kaushik Basu, chief economist at the World Bank, said in an official statement.

"This will no doubt put restraints on growth in a commodity-exporting country like Malaysia. I hope Malaysia will show the nimbleness it has shown in the past," he added.

After a weaker-than-expected 4.1 percent growth in the first quarter of 2013, economics research house CIMB Economics Research also trimmed its growth forecast for the Malaysian economy to 5.1 percent for 2013, from its original 5.5 percent growth estimate.

While Malaysia has done a good job reinvesting revenues from resource extraction in the form of machines, buildings and education, the World Bank report said, it needs to do more.

"Some adjustments are needed to spend less of the resource revenues on consumption and more on building skills and institutions that will support further diversification," said Frederico Gil Sander, World Bank's senior economist for Malaysia.

The World Bank report ranked Malaysia 12th as the most business-friendly country in the world, and 10th as the desired destination by foreign investors in the Foreign Investor’s Confidence Index, the Edge Malaysia reported.

The king of Malaysia, Yang Di-pertuan Agong Tuanku Abdul Halim Mu’adzam Shah, expressed confidence that his government will continue to build the nation and that it will become a high-income nation by 2020, according to the Edge Malaysia, a Thai weekly business newspaper.

“I have witnessed the progress of the nation move progressively. Malaysia has changed into a mid-income modern industrialized nation and now it is heading toward becoming a high-income nation that prioritizes the well-being of the nation,” the king said on Tuesday.